Flipping the housing-labor dynamic

By most accounts, the U.S. economy is doing well. Last week, we learned that inflation is rising more slowly than it was a year ago, and consumers are continuing their brisk spending. Lurking beneath this upbeat data, however, is housing, which continues to put a squeeze on the economy.

Historically, strong local labor markets typically produced healthy local housing markets as better-paid workers were able to save downpayments and buy homes. That dynamic has flipped.

Simply paying people more won’t solve the problem. But making housing less expensive would have the same effect by putting more money in people’s pockets every month. Let’s connect the dots between housing and the labor market.

Consumers and inflation

After slowing steadily in 2023, progress on inflation has stalled. For the fourth straight month, consumer prices rose 0.2 percent in October. On an annualized basis, inflation was up 2.6 percent in October from 2.4 percent in September.

Housing accounted for more than half of this increase. In October, the cost of shelter rose 0.4 percent from the prior month and hit an annual inflation rate of 4.9 percent. Persistent growth in rents and home prices has made it more difficult to bring overall inflation down to a more comfortable 2 percent.

Retail sales and housing

So far, consumers have been resilient in the face of higher prices. October retail sales increased by 0.4 percent over September, which was revised up to a vigorous 0.8 percent. These strong back-to-back readings suggest that consumers are in good shape and can continue to do the economy’s heavy lifting as we enter the fourth quarter.

But again, housing lurks. Sales at furniture and home furnishing stores fell by 1.3 percent last month. Just as low inventory and high costs have slowed home sales, slowing home sales have dampened consumer demand for sofas, tables, and other household goods. The current slowdown in durable goods spending also has been made more acute by slower-than-average home sales.

Housing-related spending, which includes construction, remodeling, rents, and utility payments, typically accounts for between 15 percent and 18 percent of GDP. Take into account big-ticket items such as furniture and appliances, and housing’s economic footprint is even bigger. Housing  slowdowns have far-reaching effects.

Renting versus buying

One important way interest rate cuts and other monetary policy decisions help Main Street is by making mortgages cheaper, which in turn makes housing more affordable.

The Federal Reserve’s recent rate cuts have been slow to trickle down to mortgage rates. Though central bank policymakers have lowered their benchmark interest rate by 0.75 percent so far this year, mortgage rates have climbed. Since the Fed’s rate cut in September, the cost of a typical 30-year, fixed-rate mortgage has gone up, from 6 percent to almost 6.8 percent last week.

Because of higher mortgage rates and high home prices, a typical renter of a single-family home now pays $600 less per month on rent than a typical homeowner pays on their mortgage each month, according to Freddie Mac.

Atlanta Federal Reserve researchers calculate that the gap between a typical household’s income and the income needed to get a mortgage on a typically priced house is an eye-watering $34,000.   

My take

The labor market historically has been a driving force in the housing market, producing a good-sized cohort of well-paid workers who are able to save downpayments and buy homes.

That force, however, has weakened.

The typical homeowner has accumulated $147,000 in home equity over the last five years due to super-charged price appreciation and low borrowing costs, according to the National Association of Realtors.

That means today’s typical homebuyer has had to adapt to higher prices, and the consequences already are profound.

At 38, the average first-time buyer today is now the oldest on record. And repeat buyers increasingly are tapping their housing wealth to pay cash for their next home. In the past year, 31 percent of repeat homebuyers paid cash; in all, 26 percent of all home transactions were all cash, another record high. 

Lack of affordable housing used to be just a big-city issue. Now the problem afflicts most of the United States, pushing up inflation and keeping inflation-adjusted wages lower than they otherwise could be.

Paying people more isn’t enough; it won’t necessarily lead to more housing. The solution is to build more affordable houses and condominiums, which will lead to people feeling better paid, because their paycheck goes further. In today’s economy, the labor-housing dynamic has flipped. A healthier housing market can help produce a healthier labor market.

The week ahead

Tuesday:  No surprise, I’m focused on housing news this week. Demand is high, but housing starts are on pace to be lower this year than last. Census Bureau data showing a pickup in starts and permits, particularly for single-family homes, could mean less of a housing squeeze on the economy next year.

Thursday: The National Association of Realtors releases October existing home sales, which have been stuck around an annualized 4 million units for the past 12 months. The median price for an existing home was $404,500 in September, up 3 percent from a year earlier.

ICYMI: There are plenty of high-paying jobs out there, but sometimes even those paychecks aren’t enough to buy a house, at least not locally. Check out our research on high earners in the United States.